Journal Article Comments on Mr. Johnson's Notes Get access D. H. Robertson D. H. Robertson Cambridge Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 19, Issue 2, 1951, Pages 105–110, https://doi.org/10.2307/2295738 Published: 01 July 1951

A great deal of controversy has taken place recently covering the field of depreciation and the acceptable method to be applied in the allocation of the expenditure of fixed assets to revenue. Every accountant knows that the straight-line method is not used in order to give the true depreciation but is used only for the reason that it is a convenient way of estimating the depreciation charge. The accounting principles governing the charging of expenditure on fixed assets to revenue are the same as those governing the charging of current expenditure to revenue and there can be no question of setting aside amounts out of profits to meet the expense. The fundamental proposition in regard to depreciation arises from the necessity of presenting income statements for periods of shorter duration than the life of the assets. It has been stated that the same principle underlying the charging of depreciation against revenue exists as applies to any other expense and therefore the general concept underlying the presentation of a true statement of operations, namely, the attempt to make an accurate matching of cost and revenue forms the fundamental basis under which a justification exists for the charging of depreciation against the revenue of a given period.

This article focuses on the accounting aspects of rate making in the public utility field. Quite a divergent array of experts participate in rate-making. Included are: economists, statisticians, engineers, accountants, lawyers, and business administrators. It is reasonable that the respective fields should raise conflicting concepts, methods, principles, and procedures. In company of such experts, representing widely differing fields, the accountant must be conversant with all of the facts and some inevitable fiction, if they contribute their share of skill and knowledge toward an equitable determination of whatever issue they is asked to help settle. A return to reproduction cost as a factor in rate-making would be greatly facilitated if the charge that it is cumbersome and misleading can be overcome, or at least materially reduced. Two suggestions come to mind. In the first place, it will be necessary to take a more liberal-and less literal-concept of reproduction cost. Another possibility is to take the original investment in a utility plant and restate it in terms of current purchasing power of the dollar. This approach would at least avoid the time and expense of a detailed inventory of plant items, which is standard procedure in appraisals.

This article focuses on fixed assets replacement as of October 1951. The inflationary influences that are rampant just now have caused the relationship between current depreciation charges and replacement costs of fixed assets to become a subject of particular concern to accountants and to management of the business enterprise. Corporate officers in industry are vitally interested in this matter because the subject of profits is discussed so much and from so many points of view. Accountants are concerned because new responsibilities have been suggested for accounting methodology. The many articles on the subject appearing in current accounting literature indicate that accountants are aware of the challenge they face. This open discussion of conflicting ideas is likely to bring satisfactory results, a study of history reveals that much of accounting's growth in the past has come in this manner. Accounting has developed slowly as men of successive generations have sought under changing legal and economic conditions to meet the needs of business of their day. It is not unreasonable, therefore, to believe that a helpful perspective on today's problem may be gained by a brief survey of the problem of fixed asset replacement as it existed fifty years ago and of the responses made to the problem by men of that day. A realization of the ideas that existed fifty years ago in regard to fixed asset replacement could perhaps help accountants to resolve this issue which is before them today.